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The M&A guide tosouth east Asia and India
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www.cliordchance.com
This legal and investment guide does not purport to be comprehensive or constitute any legal advice. It is only a guide. The inormation
and the laws reerred to are correct as at July 2009, but they may change quickly. I you would like any advice or urther inormation
on anything contained in this guide, please contact Cliord Chance or any o the regional law rms who contributed to this guide - ull
contact details can be ound on the inside back cover.
Cliord Chance 2009
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Foreword 3
India 4
Indonesia 26
Malaysia 42
Philippines 62
Singapore 84
Thailand
Vietnam
Contents
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ForewordAt the time o writing and publication o this, the rst Cliord
Chance M&A guide ocusing on south east Asia and India, the
atershocks o the global nancial crisis continue to be elt.
The past 18 months have seen bank and corporate ailures and
near-ailures, alling equity markets, and ever-increasing levels o
government money being used to prevent systemic ailure in the
nancial markets.
South east Asia - leading a recovery?
Globally, the economic turmoil has caused global M&A activity
to decline by some 50 per cent. However, whilst the decoupling
argument has been largely disproven, there remains a prevailing
view that the recession will be shorter and shallower in Asia than
in the West.
Singapore, or example, was one o the rst south east Asian
countries into recession, yet the signs o recovery are already
noticeable. Set against the bleaker landscapes o Europe, thisAsian recovery is strengthening the emerging markets ocus within
the business and nancial communities, with the region as the
centre o attention.
In addition, the indications are that private equity rms, hedge
unds and other nancial investors that had been ocussing on
portolio management are now starting to emerge rom that
process with cash to deploy, assisted by an easing in the tight
credit conditions that had previously stifed their ability to leverage
transactions. As a result, the suggested demise o these classes
o investors as major players in the regions M&A market seems
unwarranted.
Lingering difculties
However, hurdles remain. Until vendor and purchaser expectations
on the valuation o assets become more closely aligned, many
players with the resources to execute M&A transactions will sit on
the sidelines.
In addition, the relative complexity o navigating the regulatory
aspects o oreign direct investment in south east Asia and India
is uelling the conservatism that has emerged amongst investors
ater the nancial crisis. The appetite or risk has abated, resulting
in increased scrutiny o proposed transactions at investment
committee and board level, which in turn has led to the rejection
o many transactions that would have been executed easily in
recent times.
A number o jurisdictions in south east Asia have begun to ease
regulatory hurdles or oreign direct investment. For example,
new mining laws in Indonesia allow direct oreign ownership o
certain categories o mining concession. Malaysia has passed
a law relaxing the requirements or a specied proportion o the
equity o companies in certain sectors to be held by Malaysian
nationals the requirement to allocate 30 per cent o the equity
to Bumiputera has long acted as a deterring actor to oreigninvestors.
Into the future with the benet of experience
The legal systems o south east Asian countries are developing
rapidly and amendments and supplements to existing laws
are requent. This dynamic legal environment, together with
inconsistent interpretation and application, can create diculties
or oreign investors.
Given these diculties, the Cliord Chance Singapore oce,
in conjunction with AZB & Partners* (India), Castillo Laman Tan
Pantaleon & San Jose (Philippines), Chooi & Company (Malaysia),
the Cliord Chance Bangkok oce (Thailand), Mochtar Karuwin
Komar (Indonesia) and VILAF (Vietnam), has produced this guide
or oreign investors investing in south east Asia and India.
In January 2009, Cliord Chance and AZB & Partners entered
into a best riends agreement, which is a reciprocal arrangement
allowing both rms to oer clients the best possible service.
This sets a new benchmark or the delivery o legal services
or transactions involving Indian businesses or to international
businesses investing in India.
Cliord Chance regularly advises clients on M&A transactions
in each o the jurisdictions covered in this publication (as well
as other jurisdictions in Indochina and the sub-continent). In
addition to our ull service oce in Bangkok, we have lawyers on
secondment with Mochtar Karuwin Komar in Jakarta, and VILAF
in Ho Chi Minh City.
Our extensive experience in this region means that we are
uniquely positioned to advise our clients on national and pan-
Asian transactions, blending international standards with thebenets o local knowledge. Our team also has broad sector
experience, with particular strength in nancial institutions,
telecoms, natural resources and private equity.
We would like to thank each o the leading law rms across the
region or their contributions to this guide and are grateul, in
particular, to Wayne Palmer and Satbir Walia or the huge amount
o time and eort that they have dedicated to compiling this guide.
Philip Rapp
Partner, M&A/Private Equity
Cliord Chance, Singapore
Tel: +65 6410 2252
Lee Taylor
Partner, M&A/Private Equity
Cliord Chance, Singapore
Tel: +65 6410 [email protected]
* AZB & Partners is an Indian partnership rm with oces in Mumbai, Delhi, Bangalore, Pune, Chennai and Hyderabad
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India
1. What are the orms o business entity In India?
Common orms o entity
nPrivate company limited by shares
nPublic company limited by shares, which could either be an
unlisted public company or a public company listed on a
recognised stock exchange in India (listed company).
Less common orms o entity
nCompany limited by guarantee
nUnlimited company
nPartnership rms
nLimited liability partnership1
nProprietary rms
nAssociation o persons
2. How is a company managed?
The basic management structure
What form does the management structure take?
The (Indian) Companies Act, 1956 (Companies Act) provides that
the board o directors (board) o every public company and private
limited company must comprise at least three directors and two
directors, respectively.
All the powers o management o the aairs o a company are
vested in the board, with the exception o certain powers that
can only be exercised with the shareholders consent or with the
approval o the Government o India (GoI), the Company Law
Board, the Regional Director, the Registrar o Companies (RoC) or
a court o law.
All the decisions o the board are normally taken by a majority o
the directors on the board, in accordance with the provisions o
the Articles o Association o the Company (AoA).
How are directors appointed to and removed from ofce?
The manner o appointment, removal and retirement o directors
o a company is governed by the AoA, the Companies Act and,
in the case o a listed company, also by the agreement executed
by the listed company with the stock exchange on which it is
listed (commonly known as a listing agreement). In addition,depending upon the sector in which the company is engaged,
certain regulatory approvals may be required or appointment and
removal o directors.
Appointment o directors: The board may, i permitted by its
AoA, appoint additional directors at a board meeting. However,
such additional directors can hold oce only until the next annual
general meeting o the shareholders.
In the case o a listed company, the listing agreement requires
that the board should have an optimum combination o executive
and non-executive directors with not less than 50 per cent o theboard comprising non-executive directors. Further, depending on
whether the chairman o the board is a non-executive director and
whether the non-executive chairman is a promoter or a related
person, the number o independent directors on the board o the
listed company will vary in accordance with the listing agreement.
Retirement o directors: In the case o a public company, one
third o the directors on the board can be non-rotational directors.
O the remaining directors, one third o the directors retire rom
their oce compulsorily at each annual general meeting, but are
eligible or reappointment.
A private company has the fexibility to provide in its AoA the
manner o appointment, retirement and vacation o the oce or
all its directors and there is no requirement or any director to retire
by rotation.
Removal o directors: Any company may, by an ordinary
resolution, remove a director beore the expiry o his term, subject
to compliance with the procedures set out in the Companies
Act, unless the directors have been appointed according to the
principle o proportional representation.
What powers does the board have?
The board has wide powers and is entitled to exercise all powers
and do all such acts, either on its own or through its committees,
with the exception o such powers and acts that are reserved or
the shareholders according to either its AoA or by the provisions
o the Companies Act.
The board may also delegate its powers, with certain exceptions,
to a particular director or to a committee.
Are there any residency requirements for directors?
In the case o a private company, there is no requirement thatdirectors must be resident in India. In the case o a public
1 The Limited Liability Partnership Act, 2008, was notied earlier this year on 9 January 2009. As a result, the limited liability partnership is not yet common.
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company, the Companies Act prescribes that a managing director
or a whole time director or a manager must be a resident in India.
Where such a person is a non-resident, the appointment would be
subject to GoI approval.
Board meetings can be held in India or outside provided the
quorum is present at that place. Participation in board meetings
by teleconerencing or videoconerencing is possible, as long as
the prescribed quorum is present in one place. For the purpose o
calculating the quorum at a meeting o the board, attendance by
teleconerencing or videoconerencing is not taken into account.
Is there any requirement for directors to hold shares?
There is no statutory requirement or the directors to hold shares.
What duties do directors owe?
Overview
The duties and responsibilities or directors o an Indian company
arise under both statutory and common law. Under the principles
o common law, directors, as agents and trustees o a company,
owe a duty o care, loyalty and trust to the company and are
required to act in a bona de manner and in its best interests.
Additionally, the Companies Act lays down the duties and
responsibilities or directors o Indian companies. These can be
broadly classied as:
nduciary duties to the company;
nduties arising in their capacity as an agent o the company; and
nother duties under the Companies Act to the company, its
employees, shareholders and creditors.
Duty to the company
As duciaries, the directors are expected to subordinate their
personal interests to those o the company and must act in a
bona de manner towards its best interests.
Directors are under a duty to disclose their interest in any contract
to the board. The term interest includes an indirect interest
and extends to cases where the relatives o the director have an
interest in the contract.
Directors are required to obtain the consent o the GoI in certain
cases where the directors are interested.
The directors cannot, except with the consent o the shareholders
by a special resolution, hold an oce or place o prot (whether
directly or indirectly) in the company.
The listing agreement stipulates urther duties that must be
observed by the directors. For example, directors have to make
various disclosures o their shareholdings in other companies to
the company, as well as oces held in other rms and bodies
corporate.
Directors, as agents o the company, should display the utmost
standards o care, skill and diligence while exercising powers and
unctions on behal o the company.
Duty to the shareholders
Ordinarily, directors are not the agents or trustees o the
shareholders and thereore they do not owe any duciary duties
to the shareholders. A directors duty to a shareholder does not
evolve rom a legal relationship such as in the case o a company
and is dependent on establishing an independent special actual
relationship between a shareholder and a director. However, a
director is expected not to mislead the shareholders.
The shareholders o an Indian company, whether public or private,
may, by way o a derivative action, bring a claim against the
directors in the name o the company or breach o their duties to
the company and breach o trust or miseasance (in the event o
raud by directors).
Similarly, an aggrieved shareholder may bring a claim against the
directors by way o a representative action either in his own name
or on behal o other aggrieved shareholders on the grounds o
mismanagement or oppression.
The Companies Act provides that shareholders, that are not less
than 100 in number or not less than one-tenth o the total number
o its members, whichever is less, or any member or members
holding not less than one-tenth o the issued share capital o the
company, can institute such action. However, such derivative/representative actions by shareholders are not common in India.
Duty to creditors
The directors have a statutory duty not to conduct the business
o the company in a manner so as to deraud the creditors o the
company.
Duty to employees
The directors must ensure that the interests o the employees are
saeguarded and all the statutory contributions and other benets
available to an employee under the various labour laws in India are
made available to the employees.
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What types of liability can directors incur?
Directors o Indian companies may incur both civil and criminal
liability. Apart rom the Companies Act, there is other Indian
legislation (such as labour and environmental laws) that holds
the directors in charge o and responsible or the conduct o the
business o the company liable or violations by the company o
any provisions o such legislation.
However, the directors may absolve themselves rom such liability
i they are able to prove that they were not involved in, or did notparticipate in, the violation o the relevant legislation.
The Companies Act deems certain ocers to be ocers in
deault, including the managing director and the whole-time
director o the company. However, i the company does not have
a managing director or a whole-time director, then any director
specied by the board would be liable as an ocer in deault.
I no such director is specied by the board, then all the directors
o the company would be liable or the contravention. In such
a situation, they can be held responsible or non-compliance,
deault, ailure or violation o any o the companys statutory
obligations and can be disqualied rom acting as a director or
being involved in the management o a company.
Directors may be liable in tort or negligently causing loss to a
person with whom the company has entered into a contract i the
circumstances impose a personal duty on the directors to act with
proper skill or care towards that person.
Directors may be liable or miseasance i the business o a
company is carried on with the intent, or or the purpose o,
derauding its creditors.
A person may be disqualied rom acting as a director orbeing involved in the management o a company in certain
circumstances, or example, i:
nhe is ound to be o unsound mind by a court o competent
jurisdiction;
nhe is an undischarged insolvent or has applied to be
adjudicated as an insolvent and his application is pending;
nhe does not attend three consecutive meetings o the board
or any meetings o the board or a continuous period o
three months, whichever is longer, without obtaining leave o
absence rom the board;
nhe ails to pay any call with respect to shares o the companyheld by him alone or jointly with others within six months o the
last date o payment;
nhe is convicted o any oence involving moral turpitude and
sentenced to imprisonment or not less than six months; or
nan order disqualiying him rom appointment has been passed
by the court.
What are the auditing requirements for companies?
Without exception, all incorporated companies in India must
comply with the statutory requirement o having their accounts
audited. The auditor should be a member o the Institute o
Chartered Accountants o India.
3. What are the most common types o M&A transaction?
Private companies
Share acquisitions
Share acquisition transactions involving private companies enjoy
a more relaxed regime while public companies are exposed to a
more stringent regulatory regime.
Subject to compliance with the oreign direct investment (FDI)
policies (briefy described in section 5), a non-resident entity can
acquire securities o an Indian company, by way o sale, rom a
resident entity under the Automatic Route (as dened in section
5), provided that the price at which the transer takes place is not
less than
nthe ruling market price, where the shares are listed on a stock
exchange, or
na air valuation o the shares by a chartered accountant as per
the guidelines issued by the Controller o Capital Issues, and
nin the case o unlisted shares, as certied by a chartered
accountant.
However, i the company whose shares are to be transerred
operates in the nancial services sector, or in cases where the
Takeover Code is applicable, the approval o the Reserve Bank o
India (RBI) is required.
In the case o the Regulated Sectors (as dened in section 5), the
acquisition would need to comply with the sectoral guidelines,
i any, and the approval o the applicable regulators, i required
under such guidelines, would have to be sought.
Transer o securities rom a non-resident entity to a non-resident
Indian and vice versa is not permissible under the Automatic
Route and the prior approval o the RBI (in addition to the approval
o the relevant regulator, i applicable) is required.
In the case o transer o securities rom non-resident to resident
and vice versa, Regulation 20 (again, dened in section 5)prescribes certain mandatory lings with the RBI through the
authorised dealer in the prescribed ormat, such as the Form
FCTRS. These lings, along with the lings required by the
Registrar o Companies under the Companies Act, must be made
within the stipulated time.
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Business/asset acquisitions
A buyer can either acquire the entire business or undertaking o a
company (i.e. the assets and liabilities o the company) or a lump
sum amount without assigning any values to individual assets and
liabilities (a slump sale) or can choose to cherry pick the assets
and liabilities o a company, leaving certain assets and liabilities
behind in the transeror entity (an asset transer).
Transer o immovable assets rom a resident Indian entity to a
non-resident entity is not permitted under the exchange controlregulations in India. However, a oreign buyer may set up a wholly
owned local Indian transeree company in India to acquire the
immovable assets.
Acquisition o movable assets/properties may be eected through
actual or constructive delivery, provided that the relevant transer
requirements are complied with.
Acquisition o intangible property must take place pursuant to
a written document and the transer must be recorded with the
relevant registration authority.
While structuring the acquisition o the business or assets o a
company, due attention must be paid to transaction costs in the
orm o stamp duty, capital gains tax, sales tax, etc.
A transaction that is considered to be a slump sale would be
taxed only i the consideration or the transer o the business
exceeds the net worth. Such prots are taxable as capital gains
and not as business income. Apart rom income tax, a slump sale
may also be benecial rom the perspective o value added tax
(VAT), which applies to the sale o goods. An asset transer (i.e.
sale o assets/goods as opposed to the sale o an undertaking as
in the case o a slump sale) is subject to VAT.
Amalgamations
The Companies Act sets out the procedure and requirements or
the amalgamation o companies. Apart rom an amalgamation
o Indian companies, the Companies Act also envisages an
amalgamation between an Indian company and an unregistered
company, which may include a oreign company or a branch
o a oreign company. Mergers between branches o oreign
companies in India with Indian companies have been sanctioned
in the past under the terms o the Companies Act.
Mergers must be sanctioned by the High Courts o the respectivestates in which the amalgamating companies are registered.
Generally, amalgamation o two companies takes approximately
six months.
The Income Tax Act, 1961 (the Tax Act), provides certain benets,
including a waiver o capital gains tax, i an amalgamation satises
the preconditions set out in the Tax Act.
Joint ventures
Subject to compliance with the FDI Policy, a non-resident entity
may set up a joint venture company in India with a resident entity.
In sectors under the FDI Policy with oreign equity ceilings, a joint
venture with an Indian entity oten becomes necessary to satisy
the conditions o balanced shareholding over and above theoreign investment ceiling.
In other sectors, rom a new entrants perspective, actors such
as the local partners pre-established marketing and distribution
chain, human resource availability, etc, play an important role in
deciding to opt or a joint venture.
Demerger
A business transer can also be eected by a demerger, pursuant
to a scheme o arrangement under the Companies Act (which
involves shareholder/creditor consent and court sanction) by one
company (the demerged company) o one or more undertakings
to another company (the resulting company) such that:
nall the property and liabilities o the undertakings in question are
transerred to the resulting company at the values appearing in
the books o accounts o the demerged company;
nthe resulting company issues shares in itsel to the
shareholders o the demerged company in consideration or
the above transer;
nshareholders holding not less than three-quarters in value o
the shares in the demerged company become shareholders o
the resulting company; and
nthe transer o the undertakings is on a going concern basis.
Public companies
Takeovers (see section 6 for a more detailed summary of
takeovers involving listed companies)
SEBI (Substantial Acquisition o Shares and Takeovers)
Regulations, 1997 (the Takeover Code) applies to any substantial
acquisition o shares or control o either a listed company, or
o an unlisted public company or a private limited company that
owns or controls a listed company.
A listed company must comply with Section 372A o the
Companies Act and the requirements o the Takeover Code. The
provisions or share acquisitions described in section 3 also apply
to public companies.
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Schemes of arrangement
As in the case o a private company, any corporate restructuring
o a public company is also governed by the provisions o the
Companies Act, which include inter alia the reorganisation o
the share capital o the company by consolidation o shares
o dierent classes, by division o shares into dierent classes,
reduction o the share capital o the company, and the issuance o
new shares or new classes o shares.
Corporate restructuring could either be achieved as a part ointernal restructuring methods which include the issuance o
new shares, buy backs o shares and reduction o share capital
(collectively, internal methods) or by the involvement o a third
party, by which either:
na new company is ormed to carry on the same business;
nthere is the sale o an undertaking to another company;
na demerger (disposal o an undertaking to another company);
nan amalgamation or merger o one or more companies; or
nthe rehabilitation o a sick industrial undertaking (collectively,
external methods).
When undertaking a reorganisation o the share capital o the
company by the consolidation o shares o dierent classes or
by the division o shares into shares o dierent classes, the
Companies Act requires that the company, a creditor o the
company, a member o the company, or the liquidator o the
company, as the case may be, present an application under
Section 391 o the Companies Act on the scheme o arrangement
or compromise to the High Court, which is required to conduct
the process o the restructuring as provided under Sections 391
and 394 o the Companies Act. These provisions are applicable
or listed and unlisted public companies and private companies.
When undertaking any o the external methods o corporaterestructuring, the board o a public company or a subsidiary o
a public company could sell the whole or substantially the whole
o an undertaking o the company only with the consent o the
members in a general meeting.
Further, as prescribed in the listing agreement o the relevant
stock exchange, a listed company is required to le any scheme/
petition proposed to be led beore any court or tribunal under
the Companies Act or the purposes o carrying out any corporate
restructuring, with the relevant stock exchange or approval at
least a month beore it is presented to the court or tribunal.
In demergers, such approval typically stipulates a condition
whereby the shares o the resulting company are required to be
listed on the relevant stock exchange. The provisions in relation to
business/asset acquisitions as described in section 3 also apply
to public companies.
Amalgamations
The various provisions or amalgamations described in section
3 also apply to listed and unlisted public companies. Further, as
prescribed in the listing agreement, a listed company is required to
le any scheme/petition proposed to be led beore any court or
tribunal or the purposes o such merger and amalgamation with
the relevant stock exchange or approval at least a month beore it
is presented to the court or tribunal.
Joint ventures
The various provisions or joint ventures described in section
3 apply to public companies subject to the specic corporate
governance and other conditions under the Companies Act
relating to public companies.
Public-to-private acquisitions (P2Ps)
There is no specic regulation governing a public-to-private
acquisition in India. However, such acquisitions may be made
by acquiring the publicly held shares o a listed company and
subsequently delisting the company. This route would be
regulated by the Delisting Guidelines and the Takeover Code, as
noted in sections 5 and 6, respectively.
Do the parties have an obligation to negotiate in good aith
to one another in M&A transactions?
There is no legal obligation on the parties to a proposed
transaction to negotiate in good aith. As such, it is possible or
a party to terminate the negotiations or to negotiate with another
prospective buyer at any time prior to signing o the agreement.
As a matter o comort, parties generally execute a preliminary
non-binding letter o intent, a term sheet or a memorandum ounderstanding that outlines the terms o the transaction, and
which may provide or a break ee and lock out clauses.
4. What percentage shareholding is required to achieve
eective control o a company?
Under the Companies Act, shareholder resolutions are
categorised into ordinary resolutions and special resolutions.
Actions that may be undertaken by way o ordinary resolution are
those actions that can be passed by a simple majority (50 per
cent or more) o the members o the company present and votingin person or by proxy. For example, such actions could include
amending the AoA, altering the share capital o the company,
appointing or removing the statutory auditors o the company, or
removing a director beore the expiry o his period o oce.
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Special resolutions on the other hand, are required to be passed
by at least three-quarters o the members o the company
present and voting either in person or by proxy. For example,
special resolutions would be required to alter the provisions o
the memorandum o association, to change the objects o the
company or change the place o the registered oce rom one
state to another.
Any shareholder holding more than 50 per cent o the share
capital o the company will be able to exercise eective control o
the company, as typically he would have the right to
nappoint the majority o directors on the board and thereore
control the board;
npass all the ordinary resolutions without having the need to
seek consent rom any other shareholder; and
nblock a special resolution item.
5. Regulation, consents and oreign investment restrictions
General ramework o oreign direct investment policy
The Foreign Exchange Management Act, 1999 (FEMA) is the
central legislation with which any oreign investor is required to
comply or its entry, operations and exit strategy in India, including
the regulations o FEMA and more specically Regulation 20, the
Foreign Exchange Management (Transer or Issue o Security by
a Person Resident Outside India) Regulations, 2000 (Regulation
20), which regulates the transer or issue o securities by or to
persons resident outside India.
Under Regulation 20, an Indian company may - subject to the
prescribed FDI, sectoral regulations and licensing requirements
applicable to various sectors and activities (i any) - issue equity
shares, compulsorily convertible preerence shares or compulsorily
convertible debentures (securities) to persons resident outsideIndia under the Automatic Route i.e. without the prior approval
o the Foreign Investment Promotion Board (FIPB).
However, oreign investment is not permitted under the Automatic
Route in certain sectors and specic approval o the FIPB (the
Approval Route) is required. (See later in section 5 or a list o
sectors where the Approval Route is required).
In certain specied circumstances, the Automatic Route or FDI is
not available. The key circumstances are:
nwhere the activities o the Indian company require an industrial
licence under the provisions o the Industries (Development
& Regulation) Act, 1951 (subject to exceptions) (the Licensed
Industries). These sectors are listed later in section 5.
nwhere more than 24 per cent oreign equity is proposed to
be inducted or manuacture o items reserved or the small
scale sector, unless the company undertakes signicant export
obligations. However, certain exemptions are made or oreign
investments in the small scale sector i the concerned unit is
an export oriented unit, or a unit in a ree trade zone, an export
processing zone, a sotware technology park or an electronic
hardware technology park (the small scale sector).
nwhere the non-resident investor has an existing (as o 12
January 2005) joint venture or technology transer or a trade
mark agreement in the same eld in which the Indian
company now issuing the shares, or o which shares are being
acquired, is engaged (existing ventures). In such a case, theoreign investor would have to obtain the prior permission o
the FIPB to make FDI in the Indian company. However, the
onus to provide the requisite justication and proo to the
satisaction o the FIPB that the new proposal would not in
any way jeopardise the interests o the existing partner would
lie equally on the non-resident investor and the Indian partner.
Normally, a no-objection certicate rom the Indian partner is
required to obtain approval. This embargo under the Automatic
Route is not applicable:
to the acquisition o shares o an Indian company engaged
in the inormation technology sector;
to investments by certain international nancial
institutions such as the International Finance Corporation,
Commonwealth Development Corporation, etc;
to the establishment o wholly-owned subsidiaries in the
mining sector (subject to the oreign investor having no
existing joint venture or the same area and/or the particular
mineral);
to investments made by venture capital unds registered
with the Securities and Exchange Board o India (SEBI);
where the investment by the Indian or oreign party in an
existing venture is less than 3 per cent and
where the existing venture is deunct or sick.
In addition to complying with the sectoral regulations, there
are licensing requirements or certain industries (the Regulated
Sectors). These sectors are listed later in this section.
FDI is prohibited in certain sectors and in certain activities (the
Prohibited Sectors). These sectors are listed on page 11.
The government has recently issued Press Notes 2, 3 and 4
(2009 Series), which seek to modiy and clariy the position or
calculating indirect oreign investment in Indian companies and the
transer o ownership or control rom residents to non-residents
in Indian companies. This may have an impact on whether or not
the approval o the FIPB is required in certain types o companies
and may also impact the quantum o oreign investment in certain
sectors.
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Are there any regulated industries?
FDI is prohibited in these Prohibited Sectors:
nretail trading (other than single brand retail);
natomic energy;
nthe lottery business;
ngambling and betting;
nreal estate business;
nagriculture (excluding foriculture, horticulture, development
o seeds, animal husbandry, piscicuture and cultivation ovegetables, mushrooms etc. under controlled conditions and
services related to agro and allied sectors) and plantations
(other than tea plantations);
nnidhi company;
nconstruction o arm houses; and
ntrading in transerable development rights.
Further, FDI is not permitted under the Automatic Route, and the
specic approval o the FIPB is required, in the ollowing cases:
i. sectors alling under the Approval Route i.e. (a) petroleum
rening (except or private sector oil rening), natural gas/LNG
pipelines; (b) investing companies in the inrastructure and
services sector; (c) deence and strategic industries; (d) atomic
minerals; (e) print media; () broadcasting; (g) postal services;
(h) courier services; (i) establishment and operation o satellites;
(j) development o integrated townships; (k) tea sector; (l) asset
reconstruction companies; and (m) single brand retail;
ii. i FDI is in excess o 24 per cent in a company engaged in the
small scale sector;
iii. licensed Industries i.e. (a) distillation and brewing o alcoholic
drinks; (b) cigars and cigarettes; (c) electronic aerospace and
deence equipment; (d) industrial explosives; (e) hazardouschemicals; and () i the proposed location o the industrial
undertaking attracts locational restrictions;
iv. proposals alling outside the notied sectoral policy and/or
caps (Please reer to Schedule 1); and
v. i the oreign investor has an existing venture (as explained on
page 10).
Sectoral guidelines must be complied with inter alia in the
ollowing cases (which may also require a specic approval
rom the relevant regulator): (i) private banking; (ii) insurance;(iii) telecoms; (iv) petroleum; (v) airports; (vi) mining; and (vii)
broadcasting (Regulated Sectors). Please reer to Schedule 1,
which sets out the details o these sectoral guidelines.
Are there any restrictions on the oreign ownership o
shares in an Indian company?
Outside the Prohibited Sectors, FDI o up to 100 per cent is
permitted in most sectors without any requirement or prior
approval under the Automatic Route. However, in certain sectors,
FDI is subject to sectoral caps and can only be undertaken within
these ceilings either through the Automatic Route, or with the prior
approval o the FIPB, depending on the applicable guidelines.
Sectoral caps are usually in the range o 26 per cent, 49 per cent,51 per cent and 74 per cent. Schedule 1 sets out such sectors
and the applicable oreign investment limits.
Some sectors also carry minimum capitalisation norms, linked
to the percentage o oreign ownership. For instance, in the
real estate sector, i the investee company is a wholly owned
subsidiary o the oreign entity, it must be capitalised or a
minimum amount o USD10 million. I it sets up as a joint venture
company with an Indian partner, it must be capitalised or a
minimum amount o USD5 million by the oreign partner within
six months o commencement o business. In und-based non-
banking nancial services, 100 per cent FDI is allowed, subject to
a minimum capitalisation o USD50 million.
Are there any oreign exchange and investment controls?
Subject to compliance with the FEMA, an Indian company is
permitted to remit unds outside India and an oshore entity
is permitted to remit unds into India through normal banking
channels.
Is there any merger control?
Merger control is handled under the Companies Act and the
Competition Act, 2002 (Competition Act).
Companies Act: Sections 108 A to 108 I o the Companies
Act deal with GoI approval and notication requirements rom
a competition perspective and provide that, without the prior
consent o the GoI, a person may not acquire any equity shares in
a public limited company i the total nominal value o the shares so
acquired exceeds, or would together with the total nominal value
o the shares already held exceed, 25 per cent o the equity share
capital o such a company. No GoI approval is required in the case
o a private limited company that is not a subsidiary o a public
limited company.
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I the GoI is o the view that, as a result o the transer, a change
in the composition o the board o the company is likely to take
place and such a change would be prejudicial to the interests o
the company or to the public interest, the GoI may prohibit the
transer o the shares (and in certain exceptional cases, require the
shares to be transerred to the GoI).
Section 108 G o the Companies Act states that Sections 108 A
to 108 F o the Companies Act would apply only i the acquirer
would, as a result o the acquisition, become the owner o a
dominant undertaking. The term dominant undertaking isdened in Section 2(d) o the Monopolies and Restrictive Trade
Practices Act, 1969 (MRTP Act) to include an undertaking which,
by itsel or as a group produces, supplies, distributes or otherwise
controls not less than one-quarter o the goods produced,
supplied or distributed, or controls not less than one-quarter o
any services rendered in India or any substantial part thereo.
The MRTP Act has been repealed with eect rom 1 September
2009; however, the term dominant undertaking as dened in the
MRTP Act, should continue to apply to selective provisions o the
Companies Act unless the Companies Act is amended otherwise.
Competition Act: The Competition Act is not entirely notied. In
particular, the sections relating to combinations (i.e. the merger
control sections) have not yet been notied. Section 6 o the
Competition Act provides or the regulation o combinations and
prohibits anyone rom entering into a combination that causes, or
is likely to cause, an appreciable adverse eect on competition
within the relevant market in India.
Section 5 o the Competition Act provides the assets/turnover
thresholds applicable to acquisitions, mergers and amalgamations
used to determine whether a transaction would be regarded as
a combination or the purposes o the Competition Act. The
thresholds or the combined assets/turnover o the combining
party are:
Individual thresholds: the combined assets o the enterprises
are valued at more than INR10 billion or the combined turnover is
more than INR30 billion. In case either or both o the enterprises
have assets/turnover outside India, then the combined assets
o the enterprises must be valued at more than USD500 million,
including at least INR15 billion in India.
Group thresholds: the combined assets o the enterprises
valued at more than INR40 billion or a joint turnover o more
than INR120 billion, i the party being acquired or remaining ater
the merger or created as a result o amalgamation belongs to a
group. Where such a party has assets/turnover outside India, the
combined assets o the group must be valued at more than USD2
billion, including at least INR15 billion in India.
The Competition Commission o India is the competent authority
or evaluating the eect o combinations on competition in
markets in India.
What are the employee issues?
Are works councils/consultation common?
Under the provisions o the Industrial Disputes Act, 1947 (IDA), the
GoI may direct by order the ormation o work councils in certain
industries. However, in practice, such work councils have notbeen constituted so ar. Under the IDA, such work councils may
only make recommendations and an approval is not required
rom work councils or an acquisition.
Are any actions required prior to or upon an acquisition for
employees?
There are no specic actions required prior to or upon an
acquisition. However, under Section 25FF o the IDA, a transer
o the ownership or management o an undertaking rom
the employer to a new employer would result in a deemed
retrenchment o every workman who has been in continuous
service or not less than one year, unless the ollowing conditions
are ullled (the Section 25FF Conditions):
nthe service o the workman is not interrupted by such a
transer;
nthe workmans terms and conditions o service are no less
avourable to the workman post transer, in comparison with
the terms and conditions prevailing prior to the transer; and
nthe transeree is, under the terms o such transer or otherwise,
legally liable to compensate the workman in the event o his
(uture) retrenchment, on the basis that the workmans service
has been continuous and uninterrupted by the transer i.e.,
seniority benets or the past period o employment o theworkman are preserved post transer.
Are there any notication obligations for employees prior to or
upon an acquisition?
I any o the Section 25FF Conditions noted above are not ullled,
every workman in employment immediately beore the transer o
the undertaking will be entitled to notice and compensation under
the provisions o Section 25F o the IDA as set out below:
none months prior notice in writing is to be given to the
workman or one months salary in lieu o such prior notice;
npayment o retrenchment compensation which will be
equivalent to 15 days average pay or every completed year o
continuous service or any part thereo in excess o six months;
and
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ni there is any change in the conditions o service to the
detriment o a workman ollowing an acquisition, notice o 21
days must be given to all workmen whose conditions o service
are being altered.
Timing
There is no time limit specied under Indian laws.
With which stock exchange requirements must listed
companies comply?
What rules generally govern listed companies?
In addition to the Indian Companies Act and other sector specic
legislation, listed companies are governed by the provisions o:
nthe Listing Agreement, which includes various rules, regulations
and by-laws o the exchanges including mandatory and non-
mandatory compliances to be met with by a listed company
with the stock exchanges on a periodic basis and urther
mandates a level o corporate governance to be ollowed by
such listed companies;
nthe Takeover Code; and
nthe SEBI (Prohibition o Insider Trading) Regulations, 1992
(Insider Trading Regulations).
How does a company delist its share capital?
The SEBI (Delisting o Equity Shares) Regulations, 2009 (Delisting
Guidelines) govern the manner in which securities o a listed
company may be delisted rom the stock exchanges.
A company whose securities have been listed or a minimum period
o three years on any stock exchange may delist its securities
rom the stock exchanges by providing a delisting oer an exitopportunity to the public shareholders (i.e. shareholders other than
the promoters and parties acting in concert with the promoters). This
exit opportunity involves a price discovery process known as the
book building process (discussed in detail below).
A delisting oer can be launched by any promoter or acquirer
that wants to delist the companys securities. This process is
undertaken by a registered merchant banker (i.e. investment
banker) on behal o the promoters. The appointment o a
merchant banker is a mandatory requirement under the Delisting
Guidelines.
The delisting oer, however, must be supported by a resolution
passed by the board. Further, a special resolution must be
approved by three-quarters o the shareholders o the listed
company. However, the special resolution should be acted upon i,
and only i, the votes cast by the public shareholders in avour o
the proposal amount, are at least twice the number o votes cast
by public shareholders against it. The concerned promoters or
acquirer can also vote on the delisting oer.
The listed company must obtain an in-principle approval rom the
stock exchange to delist its securities once shareholder approval
has been obtained.
The promoter or acquirer must issue a public announcement
o the delisting oer. At this stage, the acquirer/promoter must
deposit 100 per cent o the consideration (determined based onthe foor price as discussed below) into an escrow account with a
bank in India.
A delisting oer must ollow a price discovery mechanism. For
this purpose, the Delisting Guidelines prescribe a foor price,
which orms the minimum price or the price discovery process as
ollows:
nwhere the equity shares are requently traded in all the
recognised stock exchanges where they are listed, the average
o the weekly high and low o the closing prices o the equity
shares o the company during the 26 weeks or two weeks
preceding the date on which the recognised stock exchanges
were notied o the board meeting in which the delisting
proposal was considered, whichever is higher;
nor inrequently traded shares, the foor price will be determined
by taking into account the ollowing actors:
i. the highest price paid or the equity shares o the class
sought to be delisted, including by way o allotment in a
public or rights issue or preerential allotment, during the 26-
week period prior to the date on which the recognised stock
exchanges were notied o the board meeting in which the
delisting proposal was considered and ater that date, up to
the date o the public announcement; and
ii. other parameters including return on net worth, book value
o the shares o the company, earnings per share, and the
price earning multiple vis--vis the industry average; and
nwhere the equity shares are requently traded in some stock
exchanges and inrequently traded in other stock exchanges,
the highest prices arrived at in accordance with the rst two
bullet points above.
The nal delisting price at which the public shareholding is to
be acquired would be a price determined based on the bookbuilding process. Under the book building process, the nal oer
price would be determined as the price at which the maximum
number o shares has been oered by the public shareholders (the
discovered price).
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Once the discovered price is determined, the promoter or acquirer
has the discretion to accept or reject it. I accepted, the promoter
or acquirer is required to purchase all the shares tendered by all
the shareholders at or below the discovered price.
For the delisting oer to be successul, the shareholding o the
promoter, along with the persons acting in concert, taken together with
the shares accepted at the nal price, must reach the higher o:
n90 per cent o the total issued shares o that class, excluding
the shares that are held by a custodian and against whichdepository receipts have been issued overseas; or
nthe aggregate percentage o pre-oer promoter shareholdings,
along with persons acting in concert with him and 50 per cent
o the oer size.
I the delisting oer is successul (i.e. the discovered price is
accepted by the promoter or acquirer and the number o shares
acquired results in the public shareholding alling below the
applicable level), the promoter or acquirer and the company must
make an application to the stock exchanges to delist the shares.
Following the delisting, the promoter or acquirer must allow
a urther one-year period or any o the remaining public
shareholders to tender their shares to the promoter or acquirer at
the above mentioned discovered price.
Generally, the entire delisting process takes approximately three to
our months to complete.
Is fnancial assistance prohibited?
What is the nature of the prohibition?
The Companies Act prohibits a public company, or a private company
that is a subsidiary o a public company, rom directly or indirectly,granting any loan, guarantee or security or any orm o nancial
assistance to any person or the purposes o, or in connection with, the
purchase o shares in the company or its holding company.
In light o this, a public company is not permitted to provide a
loan or guarantee or oer its assets as security or any loan being
raised by an acquirer or the purpose o, or in connection with, a
purchase or subscription made or to be made by such person or
any shares in such public company or in its holding company.
A public company cannot, without the prior approval o the GoI,
give any guarantee or security to its directors in connection with a
loan made by any person to them or in respect o a loan given to
any person by its director.
Private companies are not subject to similar nancial assistance
prohibitions, unless the private company is a subsidiary o a public
company.
What are the sanctions?
The Companies Act provides or stipulated penalty amounts to be
paid or the contravention o the provisions governing the nancial
assistance rules. Such transactions may be construed to be void
and unenorceable.
Are there any exceptions to the prohibition and is there any
procedure that can be followed to make nancial assistance
possible (i.e. a whitewash procedure)?
There are no exceptions to the prohibitions against nancial
assistance.
6. Public takeover
What are the orms o a public oer?
A public oer under the Takeover Code can be structured either
as a mandatory public oer or a voluntary public oer.
A mandatory public oer under the Takeover Code would be
triggered in the event o a direct or indirect acquisition o shares
and/or voting rights and/or control, beyond certain prescribed
thresholds, in a listed company (the target company). The
acquirer would be required to make a public oer to acquire a
urther 20 per cent o the shares or voting rights o the target
company.
In the case o a voluntary public oer, the public oer must be
or a minimum o 20 per cent o the voting capital o the target
company. However, in the event that the acquirer holds between
55 per cent and 75 per cent o the shares or voting rights in a
target company, and wants to consolidate his holding in the target
company, he may do so by making a public announcement as
long as he does not breach the minimum public shareholdingrequirement.
What is the regulatory ramework or a public oer?
The Takeover Code
The regulatory ramework or a public oer in India is governed
by the provisions o the Takeover Code. The Takeover Code
deals primarily with acquisitions, the consolidation o holdings,
conditional oers, a change in control, competitive oers, and
investor protection. The Takeover Code inter alia provides or
disclosures o shareholdings and control in a listed company, thesubstantial acquisition o shares or voting rights in, and acquisition
o control over, a listed company, requirements in respect o a
public oer, and the procedure or calculation o the oer price o
the shares sought to be acquired under the Takeover Code.
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Application of the rules
The Takeover Code is triggered in the event o a direct or indirect
acquisition o shares and/or voting rights and/or control, beyond certain
prescribed thresholds, in a target company. The acquirer is required
to make a public oer to acquire a urther 20 per cent o the shares or
voting rights o the target company. The thresholds or the acquisition
o shares and/or voting rights are enumerated below:
nan acquirer who, along with persons acting in concert, acquires
15 per cent or more o the shares or voting rights in the targetcompany, would be required to make a public announcement
to acquire a urther 20 per cent o the shares or voting rights o
the target company;
nan acquirer who, along with persons acting in concert, holds
15 per cent or more, but less than 55 per cent, o the shares or
voting rights in the target company, is required to make a public
announcement to acquire more than 5 per cent o the shares
or voting rights in the target company in any nancial year; and
nan acquirer who, along with persons acting in concert, holds
55 per cent or more but less than 75 per cent o the shares or
voting rights in a target company, is required to make a public
announcement to acquire any additional shares or voting rights
o the target company2 . However the Takeover Code permits
such an acquirer, along with persons acting in concert with
him, to acquire up to 5 per cent o the shares or voting rights in
the target company provided that certain conditions are met.
Regardless o whether there has been any acquisition o shares
or voting rights in a target company, an acquirer cannot directly
or indirectly acquire control over a target company, unless the
acquirer makes a public announcement in accordance with the
Takeover Code. Further, such acquisitions would include a direct
or indirect acquisition o control o a target company by virtue
o the acquisition o companies, whether listed or unlisted, and
whether in India or abroad.
What are the main oer terms?
Minimum price requirements
The Takeover Code mandates that the oer price, with respect to
a public oer, should be the highest o the ollowing:
nthe negotiated price decided upon as per the provisions o the
agreement entered into or the acquisition o shares or voting
rights or agreeing to acquire the shares or voting rights;
nthe price paid by the acquirer or persons acting in concert withhim or acquisitions, including by way o allotment in a public or
rights or preerential issue during the 26-week period prior to
the date o the public announcement, whichever is higher; and
nthe average o the weekly high and low o the closing prices
o the shares o the target company as quoted on the
stock exchange where the shares o the company are most
requently traded during the 26-week period prior to the public
announcement or the average o the daily high and low o the
prices o the shares as quoted on the stock exchange where
the shares o the company are most requently traded during
the two weeks preceding the date o the public announcement,
whichever is higher.
Where the shares o the target company are inrequently traded,
the acquirer and the merchant banker must determine the oer
price.
Cash/non-cash terms
The oer price specied above can be paid by any o the ollowing
means:
nin cash;
nby issue, exchange and/or transer o shares (other than
preerence shares) o the acquirer company, i the person
seeking to acquire the shares is a listed body corporate;
nby issue, exchange and/or transer o secured instruments o
the acquirer company with a minimum A grade rating rom a
credit rating agency registered with SEBI; or
na combination o all three options.
In the event that a payment has been made in cash by the
acquirer or acquisition o shares under any agreement or
pursuant to any acquisition in the open market or in any other
manner during the 12 months immediately preceding the date
o the public announcement, the letter o oer must provide
an option to the shareholders o the target company to accept
payment either in cash or by exchange o shares or other securedinstruments reerred to above.
Conditions
No acquirer can add any conditions once the public oer is
made, except where the acquirer has made the oer conditional
as to the level o acceptance. Once the oer is launched, it is an
unconditional oer under the Takeover Code, unless withdrawn in
the ollowing manner:
nthe statutory approval(s) required has/have been reused;
n
the sole acquirer, being a natural person, has died; ornsuch circumstances as in the opinion o the SEBI merit
withdrawal.
2 The Listing Agreement prescribes a minimum public shareholding o 25 per cent or 10 per cent o the issued capital o a listed company and thereore, or the purposes
o this paragraph, in the event that the target company has an applicable minimum public shareholding o 10 per cent, the acquisition threshold o 75 per cent o the
shares or voting rights o the target company would be read as 90 per cent o the shares or voting rights o such a target company.
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Funding the acquisition
Subject to applicable oreign exchange regulations, the Takeover
Code does not speciy any requirements or the arrangement o unds
or an acquisition. However, the acquirer must satisy the merchant
banker that rm arrangements or unds and money or payment
through veriable means to ull the obligations under the public oer
are in place. Further, the public announcement is required to contain a
disclosure to the eect that rm arrangements or nancial resources
required to implement the oer are already in place, including detailsregarding the sources o the unds, whether domestic or oreign or
otherwise. Further, the Takeover Code species that the acquirer must,
as security, set up an escrow account.
What is the timing o a public oer and what is the
procedure to be ollowed?
Simplied offer timetable
The timetable below assumes that there are no competitive bids
or the acquisition o the shares o the target company.
In the table below, D is the date o the public announcement
o an oer to acquire shares. All timelines are discussed withreerence to this date.
Date/Time period Events
Beore D Acquirer to appoint a Category I merchant banker registered with SEBI. The merchant banker should not
be an associate or a group company o the acquirer or the target company.
Trigger date Date o execution o a memorandum o understanding, share purchase agreement or other document or
the acquisition o shares or voting rights in excess o prescribed thresholds or o the making o a decision
to acquire shares or control.
On or beore D On or beore the date o the public announcement, the acquirer has to place in an escrow account, a
specied percentage o the consideration payable under the public oer, as security or perormance o
the acquirers obligations in respect o the oer.
D The merchant banker has to make a public announcement within our working days o the trigger date.
D+14 The drat letter o oer proposed to be sent to the target companys shareholders has to be led with SEBI
by this date.
D+30 This date would be the specied date or the purpose o determining the names o the shareholders to
whom individual letters o oer should be sent by the acquirer.
D+35 or later The target company must urnish to the acquirer within seven days o request by the acquirer or within
seven days rom the specied date, whichever is later, a list o shareholders as o the specied date.
D+35 or later The letter o oer may be dispatched to shareholders i 21 days have elapsed ater submission o the drat
with SEBI and SEBI has not reverted with its comments. I SEBI reverts with its comments, any changes
suggested should be refected in the nal letter o oer sent to the shareholders o the target company.
D+45 or later By this date, the letter o oer has to reach all shareholders o the target company as on the specied
date.
D+55 or later This is the date on which the public oer has to open.
D+75 Date o closure o the public oer. The public oer has to remain open or a period o 20 days.
D+82 Acquirer to open a special account with a banker to an issue registered with SEBI, and deposit therein,
the amount o consideration as would, together with the amounts lying in the escrow account, make up
the sum payable to the shareholders who tender their shares. The amounts in the escrow account are to
be transerred to this account.
D+90 The acquirer must complete all procedures relating to the public oer including the payment o
consideration. I the acquirer is unable to make payments to the shareholders within 15 days rom the date
o closure o the oer, SEBI may grant an extension i satised that the delay was not due to the acquirers
deault3. In case o delay beyond 15 days, SEBI may prescribe the interest payable to shareholders.
D+91 Merchant banker to issue a certicate to the acquirer o the completion by the acquirer o all its obligations
towards the public oer4.
D+120 The merchant banker has to send a nal report on the public oer to SEBI by this date.
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Announcements
A public announcement o an oer (excluding the case o an indirect
acquisition or change in control) is required to be made by the
acquirer within our working days o entering into an agreement or
acquisition o shares or voting rights or deciding to acquire shares or
voting rights exceeding the specied thresholds5.
With respect to an acquisition o control over a company, the
public announcement is required to be made not later than our
working days ater any such change or changes are decided to bemade.
In the case o an indirect acquisition or change in control, a public
announcement must be made by the acquirer within three months
o the consummation o such an acquisition or change in control
or restructuring o the parent or the company holding shares o, or
control over, the target company in India.
The public announcement should be made in all editions o one
English national daily newspaper with wide circulation, one Hindi
national daily newspaper with wide circulation, and a regional
language daily newspaper with wide circulation at the place where
the registered oce o the target company is situated and at
the place o the stock exchange where the shares o the target
company are most requently traded.
A copy o the public announcement must be submitted to SEBI
through the merchant banker to all the stock exchanges on which
the shares o the company are listed, and to the target company
at its registered oce to be placed beore the board o the target
company.
The public oer will be deemed to have been made on the
date on which the public announcement has appeared in the
newspapers detailed above.
The acquirer is also required to make a post oer public
announcement ollowing the closure o the public oer.
Acceptance period
The public oer to acquire shares should remain open or a period
o 20 days. However, the shareholders must have the option to
withdraw any acceptances tendered up to three working days
prior to the date o closure o the public oer.
Satisfying offer conditions
Other oer conditions that must be satised are detailed under the
section on main oer terms on page 15.
Offer unconditional payment
The acquirer must pay the relevant consideration to the
shareholders by D+90 (as set out in the table on page 16).
Competing bids
The original bidder has the option to make an announcement
revising the public oer within 14 days o the public
announcement o a competitive bid. I the original bidder does
not make such an announcement, the date o closing o the public
oer will stand extended to the date o closure o the public oer
under the last subsisting competitive bid. Any competitive oer by
a competitor should be or such number o shares which, when
taken together with shares held by him along with persons acting
in concert with him, should be at least equal to the holding o the
rst bidder, including the number o shares or which the public
oer by the rst bidder has been made.
Further, both the original bidder and the competitor bidder must
have the option to make upward revisions to their public oers, in
respect o the price and the number o shares to be acquired, at
any time up to seven working days prior to the date o closure o
the public oer. However, the acquirer should not have the optionto change any other terms and conditions o their public oer,
except the mode o payment ollowing an upward revision in the
public oer.
3 Where the approvals are not obtained due to the acquirers deault, the escrow amount would be oreited and the acquirer would also be liable or penalties prescribed.
The reusal o statutory approvals is a ground or withdrawal o the public oer. Upon such a withdrawal, the sums lying in the escrow account would be returned to the
acquirer.
4 Transer o the shares in terms o any underlying agreement can only be consummated pursuant to this date.
5 The language o the Takeover Code and various decisions taken by SEBI and the Securities Appellate Tribunal indicate that the execution o an agreement or the making
o a decision to acquire shares or voting rights could trigger public oer requirements. Such agreements may be oral or written. However, the intention/decision to acquire
shares or voting rights has to be evident rom the document in question. With respect to a decision to acquire, the public oer requirements would be triggered i any
document executed between the parties evidences a decision by a party to acquire shares or voting rights. This would presuppose some kind o consensus between
parties or the sale and purchase o the shares or voting rights in question.
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Failed bids and further offers
The Takeover Code provides that no public oer, once made, can
be withdrawn except under the ollowing circumstances:
nthe statutory approval(s) required has/have been reused;
nthe sole acquirer, being a natural person, has died; and
nsuch circumstances as in the opinion o SEBI merit withdrawal.
In the event o withdrawal o the public oer under any o the
circumstances specied above, the acquirer or the merchantbanker should:
nmake a public announcement in the same newspapers
in which the public announcement o the public oer was
published, indicating reasons or withdrawal o the public oer;
and
nsimultaneously with the issue o such a public announcement,
inorm SEBI and all the stock exchanges on which the shares
o the target company are listed, and the target company at its
registered oce.
Upon the withdrawal o a public oer as specied above, the
acquirer should not make any public oer or the acquisition o
shares o the target company or a period o six months rom the
date o the public announcement o the withdrawal o the public
oer.
Furthermore, in the event o non-ullment o the prescribed
obligations under the Takeover Code, an acquirer should not
make any public oer or the acquisition o shares o any listed
company or a period o 12 months rom the date o closure o the
public oer.
What documentation is involved in the process?
Press announcement
The details o the public announcement under the Takeover Code
are explained under Announcements on page 17.
Offer document
The Takeover Code provides or the ling o a drat letter o oer
by the acquirer through the merchant banker, with SEBI within 14
days rom the date o the public announcement. The drat letter o
oer should contain disclosures specied by SEBI and should be
despatched to the shareholders not earlier than 21 days rom itssubmission with SEBI.
Target documentation
There are no specic provisions under the Takeover Code that
provide or the submission o documentation by the target
company or a public oer. However, certain disclosures with
respect to the target company are required to be made in the
public announcement and the letter o oer.
Responsibility statements
Where the acquirer is a company, the public announcement,brochure, circular, letter o oer, or any other advertisement or
publicity material issued to the shareholders in connection with the
public oer must state that the directors accept responsibility or
the inormation contained in such documents.
The acquirer should ensure that rm nancial arrangements have
been made or ullling the obligations under the public oer and
suitable disclosures in this regard must be made in the public
announcement o oer.
A due diligence certicate should be submitted by the merchant
banker to SEBI, along with the drat letter o oer.
Within 45 days rom the date o closure o the public oer, the
merchant banker must send a nal report to SEBI.
What are the practices relating to break ees and lock-out?
The Takeover Code does not envisage the concept o break ees
in relation to a public oer.
Further, with respect to lock-out, in the event o withdrawal o a
public oer, the acquirer should not make any public oer or the
acquisition o shares o the target company or a period o six
months rom the date o the public announcement or withdrawalo the public oer.
Furthermore, on non-ullment o the prescribed obligations under
the Takeover Code, an acquirer should not make any public oer
or the acquisition o shares o any listed company or a period o
12 months rom the date o closure o the public oer.
What are the rules on inormation gathering/provision?
The Takeover Code does not prescribe any rules in relation to the
gathering o inormation rom a public oer perspective, except or
the obligation o the directors o the target company to assist withand provide the inormation sought by the acquirer.
A bidder should ensure that any due diligence on a potential target
company does not all oul o the Insider Trading Regulations.
From a practical perspective, there are a number o measures
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that a bidder should take to ensure that the due diligence exercise
does not amount to insider trading or violate the provisions o the
Insider Trading Regulations. One such measure is to obtain a clear
undertaking rom the potential target company that the inormation
that has been made available or the due diligence exercise would
not amount to unpublished price sensitive inormation.
What is the position regarding insider trading?
The Insider Trading Regulations provide that no insider should on
his own behal or on behal o any other person, deal in securitieso a company listed on any stock exchange when in possession
o any unpublished price sensitive inormation. Further, no insider
should communicate, counsel or procure, directly or indirectly, any
unpublished price sensitive inormation to any person who, while
in possession o such unpublished price sensitive inormation,
should not deal in securities.
The penalties or insider trading are:
nimprisonment or a term that may extend to ten years;
nimposition o a penalty amounting to the higher o INR250
million, or three times the amount o prots made rom insider
trading; or
nboth.
Further, SEBI may also:
ndirect the insider not to deal in securities in any particular
manner;
nprohibit the insider rom disposing o any securities in violation
o the regulations;
nrestrain the insider rom communicating or counselling any
person dealing with securities and direct the person who
acquired securities in violation o the regulations to return them
orndirect the person who acquired these securities in violation o
the regulations to transer an amount equal to the cost price
or market price o the securities, whichever is higher, to the
investor protection und o a recognised stock exchange.
What are the public disclosure requirements in a takeover
scenario?
Bidder
Generally a bidder must disclose detailed inormation about his
interest in the target company (e.g. the object and purpose o theacquisition o the shares and uture plans, i any, o the acquirer
or the target company, including disclosing whether the acquirer
proposes to dispose o or encumber any assets o the target
company in the succeeding two years, except in the ordinary
course o business o the target company).
Target
There are no public disclosure requirements or the target
company. However, the target company is required to assist and
provide or the ollowing inormation to the acquirer:
nthe paid up share capital o the target company, the number o
ully paid up and partly paid up shares; and
nsuch other inormation as is essential or the shareholders to
make an inormed decision on the public oer.
Does a memorandum of understanding (MoU) need to be
disclosed?
The Takeover Code and various decisions taken by SEBI and
the Securities Appellate Tribunal indicate that the execution o
an agreement or the making o a decision to acquire shares or
voting rights could trigger public oer requirements, irrespective
o whether such agreements are oral or written. However,
the intention/decision to acquire shares or voting rights must
be evident rom the document in question. With respect to
a decision to acquire, the public oer requirements would
be triggered i any document executed between the parties
evidences a decision by a party to acquire shares or voting
rights. This would presuppose some kind o consensus between
parties or the sale and purchase o the shares or voting rights in
question.
A MoU, where the intention/decision to acquire shares or
voting rights is evident, operates as a trigger date or a public
announcement and the Takeover Code prescribes disclosures
o various aspects o such documentation in the public
announcement.
What are the limitations to stakebuilding?
The Takeover Code provides or the ollowing limitations to
stakebuilding while a public oer is pending:
nno acquisition should be made by the acquirer during the last
seven working days prior to the closure o the public oer; and
nwhere an oer is made conditional upon a minimum level o
acceptance, the acquirer or any person acting in concert with
him should not acquire, during the oer period, any shares in
the target company except by way o resh issue o shares o
the target company in accordance with the provisions o the
Takeover Code.
Is there a requirement to make a mandatory oer?
As a general rule, a public oer has to be made or a minimum o
20 per cent o the voting capital o the target company, where an
acquirer who, along with person acting in concert, has acquired
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15 per cent or more o the shares or voting rights o the target
company.
The only exception to this rule is when an acquirer who (together
with persons acting in concert with him), holds 55 per cent or
more, but less than 75 per cent, o the shares or voting rights
in a target company, wants to consolidate his holding without
the target company breaching the minimum public shareholding
requirement. Such an acquirer may make an open oer to the
shareholders o the target company to acquire their shares and
the size o such public oer should be the lesser o the ollowing:
n20 per cent o the voting capital o the target company; or
nsuch other lesser percentage o the voting capital o the target
company as would, assuming ull subscription to the public
oer, enable the acquirer, together with the persons acting in
concert with him, to increase his holding to the maximum level
possible which is consistent with the target company meeting
the minimum public shareholding requirements laid down in the
Listing Agreement.
What deences are available to a target company during the
stages o an oer?
The Takeover Code does not provide or any specic deences
that a target company can avail o in the case o a hostile
takeover. However, rom a practical perspective, as the Takeover
Code assumes a level o co-operation with the target company
with respect to provision o inormation etc., the target company
has the ability to delay the public oer process by reusing to
provide any necessary inormation.
What obligations are the directors o the bidder and target
under?
Bidder
Where the acquirer is a company, the public announcement,
brochure, circular, letter o oer or any other advertisement or
publicity material issued to the shareholders in connection with the
public oer must state that the directors accept responsibility or
the inormation contained in such documents.
Target company
The board o the target company has consideration obligations
under the Takeover Code. The board o the target company is
required to acilitate the acquirer in the verication o securities
tendered or acceptances.
What is the procedure or a squeeze-out o the minority?
There are no specic provisions or squeezing out the minority
under the Indian legal system, including under the Takeover Code.
However, there are various methods which can be implemented to
squeeze out or buy out minority or residual shareholders o an
Indian company pursuant to the conclusion o a voluntary delisting
process under the Companies Act. This is a challenging exercise
and there are limited precedents o this nature in India.
Section 395 o the Companies Act provides or the compulsoryacquisition o the shares o a shareholder in a company by
another company, pursuant to a scheme or contract approved
in accordance with the section. When a company incorporated
in India (transeree company) oers to purchase shares in a
company (transeror company) and such a public oer is accepted
by the shareholders on the basis that 90 per cent in value and
75 per cent in number o the shares are to be purchased within
our months o the oer, such an acceptance would amount to
approval o a contract to purchase shares under Section 395 o
the Companies Act. Within two months, i the transeree company
gives a notice to any dissenting shareholders, it will be entitled
to acquire the shares o such dissenting shareholders. Such
an acquisition may be subject to the courts order i any o the
dissenting shareholders through an application to the court object
to the acquisition.
7. Overview o a private company acquisition
Timing
Since there are a number o actors that would come into play in
various types o private company acquisitions, timing varies rom
transaction to transaction. However, i the target private company
operates in a regulated sector, the time taken in obtaining the requisite
approvals rom the FIPB or the RBI or relevant authority, as the casemay be, will also have to be actored in to the timing process.
Steps
The ollowing steps are involved in most transactions:
ntypically in any acquisition transaction, the rst step would be
to execute a non-disclosure agreement;
nthe next step would be to appoint the intermediaries, such as
lawyers and accountants, etc. Depending upon the nature o
the transaction, investment bankers may also be appointed;
nnegotiations commence soon ater and the parties execute
a heads o agreement or a term sheet or memorandum o
understanding;
nonce the term sheet has been executed by all involved parties,
a due diligence process begins, including legal, nancial and
technical diligence;
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nsometimes, simultaneously with the start o the due diligence
process, the parties proceed towards drating the transaction
documents such as the share purchase agreement or the
share subscription agreement depending upon the type
o acquisition, shareholders agreement and other ancillary
documents i required. These transaction documents contain
certain conditions that the investee company and/or the
promoters o the investee company are required to ull beore
completion o the transaction (the conditions precedent);
nonce the parties have reached an agreement on all the terms
o the transaction documents, they proceed to execute thetransaction documents;
non signing the transaction documents, the investee company
and/or the promoters proceed towards satisying the
conditions precedent; and
nater all the conditions precedent are ullled to the satisaction
o the investor and all regulatory approvals have been received
or the transaction, the parties proceed towards closing and
carry out all the closing actions stipulated in the transaction
documents. Once these are ullled, closing o the transaction
is achieved.
8. What tax issues should be considered?
Tax gains
Capital gains are calculated as sale consideration less the cost
o acquisition and expenses relating to transer. The rate o tax
depends on whether the capital gains are considered to be
long or short term. Long-term capital gains are gains arising
rom the sale o securities that have been held or more than 12
months. Short-term capital gains are gains arising rom the sale o
securities that have been